Saudi Arabia was the most attractive PE investment destination in 2011 mainly due to the Kingdom’s government initiatives and to its relaxed foreign ownership norms, which increases the likelihood of attracting higher volumes of PE capital, according to experts from leading advisory firm Ernst & Young.

Speaking at the “PE Partners – Saudi Arabia 2012” summit held recently, Fahad Altoaimi, the office managing partner, E&Y Riyadh, said: “We are committed to supporting the Kingdom’s PE sector though our association with the event. Saudi Arabia is easily one of the region’s most important players and will continue to attract capital and investment."

"Fundamental factors like demographics, the robustness of its financial institutions, a very healthy economic outlook and steady growth continue to position the Kingdom as a leading PE destination," he noted.

Phil Gandier, the Mena head of Transaction Advisory Services at E&Y, hosted a session on Mena’s Past, Present and Future Role in Global Private Equity at the summit.

Addressing the gathering, Gandier said, "PE firms are relatively new to the region – the majority of the active ones were founded in the last five to six years, and many are still in the fund deployment stage."

"The growth of PE investment in MENA is expected to be driven by funds that target healthcare, education, infrastructure, oil & gas services and consumer-focused industries," he noted.

“PE firms are likely to continue to raise funds from limited partners, grow their portfolio companies and focus on new investment opportunities,” Gandier added.

According to him, PE firms in the region face critical challenges in three key areas – new fundraising, exit routes and potential investment.

Fundraising activities in the region have become much more challenging, post the financial crisis, which increased the level of conservatism from investors. The difficulty of exiting existing portfolios continues to be a significant issue for the regional private equity industry.

The financial crisis impacted the number of active PE funds operating in the region, resulting in a reduction in total active firms. International investors have put additional capital commitments in the region on hold due to concerns about political unrest in some Mena countries, he noted.

PE firms also face regulatory and legal limitations for the acquisition of controlling stakes, which continues to affect the value creation model. The purchase of publicly listed companies by PE firms is still very difficult. The potential pipeline of investible companies with strong earnings and profitability growth is limited in the region, he added.

While challenges exist within the PE investment landscape in Mena, the region and the Kingdom in particular continue to be an attractive PE investment destination, said the E&Y experts.

In order to realize the potential for PE in the region, firms will need to develop innovative operating models to overcome regulatory and legal regimes, said the experts.

This will greatly aid them to grow existing portfolios and make new investments across the region. The value created will be a key competitive advantage for PE firms to prepare for exits through trade sales rather than the current sluggish IPO market.

PE firms are already testing the limits of limited partners’ ability and willingness to start new funds. Sovereign wealth funds (SWFs) are emerging as a potential source of capital to help bridge the fund-raising gap, they stated.

“In addition to Saudi Arabia and Egypt, there is a focus on Tunisia, Morocco and the UAE as attractive hubs for investments," remarked Gandier.

"The positive outlook has continued in 2012, growth capital and buyout funds closed more than 20 deals during the first quarter of this year. Experts are optimistic about continued growth and opportunities across Mena. As the regional PE industry matures, the secondary market is expected to play a more important role in the next five years,” he added.-TradeArabia News Service